Treasurys fall as QE clouds market

NEW YORK (MarketWatch) — The Treasury market turned a morning rally into an afternoon slump Monday as the benchmark U.S. government debt yield rose to its highest since mid-March.

Market chatter about how and whether the Federal Reserve may taper its bond-purchase program—known as quantitative easing, which artificially holds down interest rates—continued to dominate the market during a week of public appearances by Fed officials.

The benchmark 10-year note
US:10_YEAR
yielded 1.965%, 1 basis point higher on the day, to its steepest level in two months. The 30-year bond
US:30_YEAR
yield traded up half a basis point at 3.174%, while the 5-year note
US:5_YEAR
yield traded up slightly at 0.837%. Yields move inversely to prices.

“We are sitting in a situation here of pretty emotional markets,” said David Keeble, head of interest-rate strategy at Crédit Agricole Corporate and Investment Bank.

Fed Chairman Ben Bernanke will testify before Congress and the Federal Open Market Committee will release its meeting minutes Wednesday. St. Louis Fed President James Bullard and New York Fed President William Dudley are on tap for Tuesday. Bullard will speak again on Thursday.

Dallas Fed President Richard Fisher said Monday morning he would have voted to start tapering the purchase of mortgage-backed securities at the last Fed meeting, though he expressed disappointment in the pace of employment growth. He isn’t a voting member of the rate-setting body this year.

Until then, many are holding off on making big bets in the Treasury market.

“Most people are looking to Wednesday,” said Matt Duch, portfolio manager at Calvert Investments. “Things are just kind of bouncing around here.”

Key references to watch will be Bernanke’s level of satisfaction with the unemployment rate, and the rate of inflation, as measured by the consumer price index and core personal consumption expenditures, said Vishal Khanduja, taxable fixed-income portfolio manager at Calvert Investments.

“Historically in Ben Bernanke’s speeches, he will always play it straight down the fairway,” said Khanduja.

German bonds, or bunds, lost ground in tandem with U.S. Treasurys; the 10-year bund
TMBMKDE-10Y, -15.64%
yield closed up nearly a basis point to 1.372%, according to Tradeweb.

The Treasury Department bought back $1.45 billion of government debt Monday as Treasurys reversed course, which also took some supply out of the market, Keeble noted.

The Chicago Fed’s National Activity Index on Monday was a negative 0.53 in April, down from the negative 0.23 reported in March. A zero recording of the index indicates trend growth and negative 0.70 indicates an increased likelihood of recession.

Before Treasurys swung to losses Monday, the market rallied as investors found the familiar yield threshold of 1.95% on the 10-year note as an attractive spot to buy into the market.

“In this post-April-jobs-report correction, we’ve hit this level a couple of times,” said Morgan Stanley’s Flanagan, noting that the 1.95% level has served as a tactical inflection point for the direction of yields on the benchmark note.

Better-than-expected April data showed the U.S. unemployment rate slipped a tick to 7.5%, beginning a three-week selloff in Treasurys that has hiked the 10-year note yield roughly 35 basis points.

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